ACCA P7 (INT) Advanced Audit & Assurance - Study Text

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Answers to practice questions

10 Quality control documentation

Communication of procedures

 Memoranda to all partners and staff.

 Quality control manual.

Appointment/reappointment

 Minutes of a meeting to discuss.

 File note re engagement partner’s decision with appropriate justification.

Ethics

 Staff manual containing guidance.

 Annual declarations by staff re share interests in clients, personal relationships

with clients etc

Skills and competence

 Documentation of recruitment procedures including job specification,

curriculum vitaes, record of interviews etc.

 Existence of technical library.

 Technical circulars and memoranda.

 Record of attendance at professional courses with evidence of review for which

courses were attended by which staff at which particular levels.

 Training/CPE records with evidence of review.

 Staff planning schedules with consideration of:

− exposure to different types of audit

− mix of staff to give experienced staff the chance to supervise and junior staff

the opportunity to learn from their supervisors.

Consultation

 Evidence of a structured approach to file review (e.g. lead schedules signed off

by senior, then manager, then partner).

 Letters/memoranda/minutes showing discussion of technical problems or

matters of judgement at an appropriate level.

Monitoring

 Records of ‘cold’ file review by persons independent of audits being reviewed.

 Evidence of consideration of required level of competence of designated reviewers.

 Proof that recommendations for improvement are implemented (e.g. may be

noted at the planning stage of a subsequent audit).

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11 Tower Accountants

(a) Communication brief

To: All employees of Tower Accountants

From: New partner

Date:

Subject: Quality control

Please find details below regarding the subject of quality control policies and

procedures. I will shortly be arranging a time for a presentation to be followed

by a staff question and answer session.

(i) Why quality control policies and procedures are necessary

ISA 220 Quality control for an audit of financial statements requires that all

firms implement quality control policies and procedures at the

engagement level. ISQC 1 Quality control for firms that perform audits and

reviews of financial statements, and other assurance and related services

engagements requires all firms to implement quality control policies and

at the firm level. It is therefore clear that the audit profession as a whole

perceives such policies and procedures to be necessary. The key reasons

for this are set out below.

Whenever an audit assignment is performed by a firm there are several

risks which they are exposed to such as performing work negligently

such that the client or indeed a third party suffers loss as a result. This

could have an adverse effect on the audit firm – its reputation could

suffer, and therefore both the income from that client and potential

clients may be lost due to the loss of one client.

Another risk that could materialise if there were insufficient/inadequate

quality control procedures is that an audit report may be unmodified

when in fact it should be modified or vice versa e.g. it could be

unnecessarily qualified.

Such risks are clearly ones that should be avoided by any firm and

therefore proper management of quality control within our firm is vital.

(ii) Areas that should be covered by quality control policies

 Professional requirements for all personnel – it should be ensured

that all staff adhere to the ACCA’s principles of independence,

integrity, confidentiality and professional behaviour.

 Skills and competence of all staff – all staff should be either fully

qualified or trained for the work that they are performing, and a

system should be in place to ensure that knowledge is kept up to

date.

 Acceptance and retention of clients – the firm should ensure that it is

able to perform the audit i.e. that it has the necessary capacity and

skills, would be able to remain independent, and that the client’s

directors and management are trustworthy and have integrity.

Answers to practice questions

 Assignment of personnel to the audit – appropriate staff must be

assigned to each audit i.e. they must have the relevant skills and

experience to perform the work.

 Delegation of work to staff undertaking the audit – all work that is

delegated must be performed to satisfactory standards and meet

quality control criteria. Adequate direction, supervision and review

should exist throughout all stages of the audit.

 Consultation – there should be consultation within the firm with

other audit managers or partners on subjective audit issues; in

addition, where necessary, consultation with external

bodies/individuals on specialist issues should also be conducted.

 Monitoring quality control policies – an important part of any

quality control system to ensure that such policies stay relevant and

are sufficient; an effective and appropriate system should be in place.

For audits of listed companies an engagement quality control review

must also be carried out by a reviewer independent of that

engagement.

(iii) Procedures required to ensure that quality control policies are met

An outline of the procedures that would be required within Tower

Accountants to ensure that quality control policies are met is detailed

below. These will be expanded and refined following discussions within

the firm:

 Division of staff – current job titles will be reviewed for all staff to

ensure that these are still meaningful and accurate, and properly

represent the duties undertaken by each individual. The organisation

chart will be updated and copies issued to all staff and included

within the staff manual. This will ensure that there are no

misunderstandings regarding any individual’s reporting lines.

 Training of staff – a training course will be devised to ensure that all

staff understand and are familiar with the firm’s quality control

procedures. These procedures will be documented and will form

part of the induction process for all new members of staff. Ongoing

training methods will also be devised to ensure that all staff are kept

up to date with current issues.

 Ethical requirements – independence requirements should be

communicated to all staff and they should be required to notify the

firm of any circumstances or relationships that might cause a breach.

 Acceptance and retention of clients – there should be a system in

place which ensures that prior to accepting any new client, and when

reviewing all existing clients’ circumstances, all such relevant factors

are considered.

 Working papers – these will be standardised to ensure that all the

work that is required for each part of the audit is complete and

documented. It should also ensure that work is properly reviewed at

the appropriate level at the required stages in the audit.

 Consultation – any issues that arise during the course of the audit

which are subjective and/or contentious should be discussed with a

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senior member of Tower Accountants, or, where necessary,

discussed with an approved specialist outside of the firm.

 Proper/effective recruitment and retention policies and procedures –

to ensure that the right personnel are selected for the right job, and

that such staff are retained within the firm.

 Monitoring of quality control policies – a monitoring process should

be established to check that the quality control system is operating

effectively. This should include inspecting, on a cyclical basis, at least

one completed engagement for each engagement partner.

(b) Queries from the question and answer session

(i) Difference between a hot review and a cold review

A hot review is a review of working papers that is performed by a more

senior member of staff during the course of the audit, and is usually

performed soon after the work is completed. The reviewer will indicate

that he has performed the review by dating and initialling the piece of

work. The review should ensure that the work has been performed in

line with the audit programme and that the conclusions are consistent

with the results obtained.

A cold review is one that is performed at the end of the audit – usually

by the audit manager or partner. This will be done before the audit

report is signed off and will comprise a review of the whole file together

with the financial statements. The purpose of this review is to ensure

that the audit work has been fully completed and that the results and

conclusions for the entire audit are consistent.

(ii) Why all audit reasons and justifications need to be documented in the

audit working papers

All audit reasons and justifications need to be documented in the audit

working papers because those working papers need to be sufficiently

detailed and complete to enable an auditor with no previous experience

of the audit to establish what work has been completed and how the

conclusions were reached. This would become especially important if

the auditors had to give evidence in a court of law regarding the audit. It

should also be clear from the documentation in the file that the auditors’

conclusions are reasonable.

(iii) Reasons for standardised audit working papers

The standardisation of audit working papers ensures that work is

performed consistently across audits, and that the evidence that is

necessary for each piece of work is always obtained. However, the

working papers should not be so rigid that they inhibit the auditors’

skills and flair, as these are the factors that make the difference between

a good and a bad auditor. Auditors should always be looking for

anything unusual when performing their work and if any such issues

are identified then they should be put on notice and ‘dig deeper’. Any

such instances should never be ignored just because such work is not

part of the standard programme. Auditors must be flexible in their

approach, and use their initiative.

Answers to practice questions

12 Lancaster Leisure

(a) Advantages and disadvantages of tendering for the audit

A number of issues require careful consideration before deciding whether or

not to tender for the audit.

Advantages

 Increased fees – this would be especially advantageous as the audit firm

has recently lost two clients.

 There is the possibility of additional work (i.e. management consultancy)

as well as the audit which would significantly increase the firm’s overall

fee income.

Disadvantages (and risks)

 Lancaster Leisure (Lancaster) is currently experiencing difficulties in

respect of sales.

 Lancaster has had staff morale problems which could make the audit more

difficult as staff may be unwilling to co-operate with the auditors or may

present an unbalanced view of circumstances due to their low morale.

 Lancaster has not invested in non-current assets recently. This has only

compounded its current financial problems and will not help in improving

the outlook for the future and the company’s long term viability, especially

taking into account the other mitigating factors such as the retirement of

the managing director, staff issues and pending litigation.

 There is a litigation case currently outstanding from an employee

regarding an accident in the workplace – the audit firm would have to

ensure that this is correctly treated. Furthermore, the finance director is

suing Lancaster for unfair dismissal. Both of these litigation cases should

put the audit firm on notice that the situation within Lancaster is one

which is far from ideal for taking over an audit.

 The audit firm should ascertain what has happened to the previous

auditors i.e. did they resign, or were they removed from office – reasons

for either of these situations should be ascertained. The previous auditors

should be contacted for relevant information.

 Although the audit fee represents increased total fee income for the firm,

this, together with the potential amount for the consultancy support,

would mean that the total income from Lancaster represented 18.5% of the

firm’s total fee income. The audit fees on their own represent 3% so clearly

this is well within the recommended limit of 15%. However, because of the

potential additional income, the audit firm would have to be aware of any

independence issues, and take appropriate action.

 A company search should be undertaken to confirm who is involved in the

running of Lancaster, and a copy of the filed financial statements should

be obtained. Credit references should also be obtained.

 Discussions should be held with management and their lawyers regarding

the litigation case, as the outcome of the cases could have a significant

impact on the profit for the year.

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 If the tender is unsuccessful then all the work involved will have been

wasted and this clearly has a cost implication to the audit firm.

 Background information regarding the industry as a whole and for

Lancaster specifically should also be obtained to ascertain whether or not

expert assistance would be required, and whether the audit firm has the

relevant skills and experience to perform the audit.

(b) Factors to be taken into account when calculating the audit fee for inclusion

in the tender document

 What work will be required to be performed for the audit – this depends

on how complex Lancaster’s financial affairs are and whether or not the

audit firm will be able to rely on the controls in existence. Although the

latter will not be known until the audit work is started, the firm may be

able to get a feel for this from the initial information obtained. The tender

should state this and make allowance for this in the price.

 What the fee is for similar companies audited in respect of size,

complexity, degree of risk.

 What the set up costs would be for the audit and then subsequent annual

costs. The first audit will obviously take more time due to the systems

documentation required.

 The level and number of staff that will need to be involved in the audit.

 The fee charged must be able to be clearly explained and analysed.

 Whether or not the fee can be easily renegotiated at a later date.

 Ensure that the client is clear as to what is included in the audit fee and

what would have to be paid for in addition if required.

firm decided to tender

 The fee and how it has been calculated.

 The nature, purpose and legal requirements of an audit.

 An assessment of Lancaster’s requirements for the audit and the

management consultancy support.

 Details of how the audit firm will satisfy Lancaster’s requirements in

respect of the audit and the management consultancy support.

 Any assumptions made by the audit firm in preparing the tender e.g. work

to be done by Lancaster’s staff.

 The audit methodology/approach to be used for the audit, together with

how the management consultancy work would be approached.

 Details of the firm and its personnel who are likely to be used on the audit

and for the management consultancy work (organisation charts may also

be included).

 The other services that the audit firm can offer in addition to management

consultancy.

Answers to practice questions

13 Audit approaches

(a) Substantive approach versus combined approach

Substantive approach only

Where internal controls are initially assessed as weak, there is no point in

testing them as this will only confirm that control risk is high and that a

systems-based approach is therefore not appropriate.

Internal controls will be weak in small organisations where there are too few

staff for proper segregation of duties. Also, in a small organisation where the

owner-manager operates the system of internal controls, he can easily

override controls which he himself has set up. Even where controls exist, there

may be no evidence that those controls have been operated.

In addition, for smaller organisations, it is not appropriate to perform tests of

controls if it is quicker (and therefore more efficient) to check all (or a

substantial proportion of) transactions during the year. Performing tests of

controls involves a fixed time (to ascertain and record the systems and

evaluate controls as well as testing them) which cannot be recouped in the

relatively short time needed to substantively test transactions.

As an extension of a purely substantive approach, a statement of financial

position approach may be suited to small companies. In the statement of

financial position approach, the auditor concentrates primarily on testing

balances as opposed to balances and transactions. It is also an approach suited

to companies where assets and liabilities are substantial in relation to

transactions (e.g. investment companies). This approach is based on the

accounting equation whereby opening net assets plus profit for the year

equals closing net assets. The theory is that if opening net assets were correct

and closing net assets are also correct then the profit for the year must be

correct.

Combination of a systems-based approach and substantive procedures

On larger audits, the auditor will usually seek to place reliance on internal

controls as this will allow him to perform reduced substantive procedures.

This approach is preferable where audit testing time will be less than that

needed for (extensive) substantive testing alone.

Generally a combined approach will result in a more cost-effective audit

where there are:

 sufficient staff to allow the operation of an effective system of internal

control, and

 a large number of transactions.

To take a wholly substantive approach in this situation would require a large

number of transactions to be vouched, whereas testing internal controls

produces a lower control risk which requires fewer substantive procedures.

Paper P7 INT: Advanced audit and assurance

(b) Business risk approach

The meaning of the business risk approach

The business risk approach involves the auditor looking at the business as a

whole and carrying out an evaluation of the risks to which it may be exposed.

The general approach will be to:

 identify the key business risks

 evaluate their possible impact on the financial statements

 plan the approach to the audit around the key business risks identified.

In order for this approach to work effectively, the auditor must have a good

understanding of the client’s business and of the environment in which it

operates. The auditor is interested in business risk not for its own sake, but in

the light of its possible impact on the financial statements.

The business risk approach is sometimes referred to as a ‘top down’ approach

to an audit. The approach starts with the business, which generates the

financial transactions. It ends with the financial statements which record the

outcome of the business transactions. It is the business which ‘drives’ the

financial statements.

Advantages

 The business risk approach starts at an earlier stage than the conventional

audit risk model, based on inherent and control risks. By looking at the

nature of the business itself, the auditor should get a more complete

picture of the events which may affect the entity’s ability to meet its

objectives. By doing so the auditor will better understand the inherent and

control risks to which the business may be subject.

 It provides a framework for the audit, helping to identify areas where most

work should be performed. This will be linked to the auditors’ assessment

of the materiality of the risk and the likelihood of the risk crystallising.

 The business environment is changing rapidly – a business risk approach

keeps the auditor up-to-date.

 Evidence suggests that major audit problems are more likely to result from

business related problems than from control weaknesses.

 This approach may allow the auditor to ‘add value’ by making effective

recommendations to improve the performance of the client’s business.

 Audit costs may be reduced as a result of the use of less detailed audit

testing.

 The approach may benefit the auditor’s own business as it indicates the

use of a modern approach, which may differentiate the firm’s product

from that of its competitors.

Limitations

 The approach requires the use of more experienced audit staff, including

partners and managers. This may serve to cancel some of the cost savings

mentioned above.

 The closer involvement that the approach requires from the auditor may

raise questions about auditor independence.

Answers to practice questions

 Some auditors feel uneasy about the ‘broad’ view taken by the business

risk approach.

 The approach may be effective only in the case of audits of larger entities

by larger firms.

14 Artemis Aviation

(a) Principal control risks and internal controls to mitigate

Fuel

Risks

 Fuel could be lost or misappropriated.

 Fuel could be used without being charged to an external customer.

 Fuel could be stored inadequately leaving the company exposed to

breaches of environmental/health and safety regulations.

Controls

 Fuel should be stored in accordance with environmental/health and safety

regulations.

 Receipts of fuel should be logged.

 Receipt and issue of fuel should only be made by one of the mechanics.

 Internal issues of fuel (to the flying school) should be authorised, by one of

the two directors on a fuel requisition form.

 External issues of fuel should only be made to credit-checked clients,

within their credit limits, and should result in a form, signed by the client,

acknowledging receipt of that quantity of fuel.

 Regular fuel reconciliations should be carried out agreeing a fuel dip to the

record of theoretical fuel. Discrepancies outside a certain range should be

investigated.

Maintenance

Risks

 The company’s aircraft may not be properly maintained, leading to

safety/regulatory risks.

 Parts and mechanics’ time may not be properly charged to clients’

accounts.

 Parts could be lost/misappropriated.

Controls

 An adequate timesheet system should be operated to ensure that all hours

worked are properly authorised, all chargeable hours are properly charged

and that mechanics are properly employed on the company’s or its clients’

aircraft.

Paper P7 INT: Advanced audit and assurance

 An adequate stores control system should be set up to ensure that parts

ordered and issued are authorised, checked on receipt and charged to

clients.

 A periodic physical inventory count should be carried out and any

discrepancies between book and physical inventory investigated.

Flying school

Risks

 Tuition charged on a credit basis could lead to bad debts.

 Outside instructors could be paid for hours not worked.

Controls

 Tuition should only be offered on a credit basis to credit-checked clients,

within their credit limits.

 All other clients should purchase pre-paid vouchers.

 Charges for outside instructors should be authorised to ensure that only

tuition provided is paid for and at an agreed rate (e.g. agreed rate ×

number of hourly lessons taken).

Tie down and hangar services

Risks

 Unauthorised aircraft could be tied down/stored in hangars.

 Charges for authorised aircraft may not be billed.

Controls

 Physical controls over access to hangars/tie down lots with only

authorised aircraft allowed access.

 Daily log taken of aircraft stored in hangars/tied down with monthly bills

drawn up on this basis.

Regulations

Risks

 If the company does not adhere to local aviation authority regulations (e.g.

over safety, fuel storage, flight records, maintenance and testing of aircraft)

it could lose its operating licence.

Controls

 The directors should ensure that regulations are followed and monitor any

changes in regulations.

(b) Appropriate audit strategy

Even with the controls suggested above, Artemis Aviation remains a small

family-owned company. As such, it carries the internal risks of domination by

ACCA P7 (INT) Advanced Audit &amp; Assurance - Study Text - 2010 (Emile Woolf Publishing)

Подождите немного. Документ загружается.

ACCA P7 (INT) Advanced Audit & Assurance - Study Text - 2010 (Emile Woolf Publishing)